Definition:
The Sargan test is a test of the validity of instrumental variables. It is a test of the
overidentifying restrictions. The hypothesis being tested with the Sargan test is that the
instrumental variables are uncorrelated to some set of residuals, and
therefore they are acceptable, healthy, instruments.
If the null hypothesis is confirmed statistically (that is, not rejected), the instruments pass the test; they are valid by this criterion.
In the Shi and Svensson working paper (which shows that elected national governments in 1975-1995 had larger fiscal deficits in election years, especially in developing countries), the Sargan statistic was asymptotically distributed chi-squared if the null hypothesis were true. (Econterms)
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